Despite the extent of their economic integration and attempts to penetrate the corporate veil, the Japanese and South Korean governments have shown that they continue to share a resilient bond with business. While they are far fewer than in the heydays of rapid economic expansion, when interventions happen they are hard to miss. From banks to shipyards and technology industries, Japan and Korea have stepped into the business realm at multiple occasions in the name of the public interest. While silently applauded by business executives and implemented in the name of saving jobs, these interventions occasionally lead to international legal dispute and raises an important question: when will these governments claim their right to regulate in the public interest and how does that uncertainty impact the investment climate of two of Asia's main economies?

Recent developments

Over 2017 and 2018, the Republic of Korea (ROK) made policy interventions through fiscal policy and legislation. This happened recently in March 2018 with General Motors (GM) threatening to withdraw its investments in Korea, shutting down its manufacturing plants in the country. GM Korea has long been underperforming both financially and in terms of production due to a rather stark combination of corporate indebtedness and poor financial management. Shutting down its factories, such as the one in Gunsan, would result in the termination of 16,000 workers, most of who have yet to receive their wages. The country was divided on whether the government should intervene. To intervene would essentially reward GM for its poor management practices in Korea using public finance while doing nothing would mean that the burden would fall almost entirely on the workers in the afflicted areas. Through long and contentious debates, the Korea Development Bank, a policy bank, decided to enlarge its original investment in GM Korea by $750 million in exchange for, amongst other things, a 10-year presence commitment in the country.

Yet this only drew more attention to a stubborn debilitation of historically key sectors in Korea’s manufacturing base. The ROK intervened in GM not because it wanted to maintain the investment, but because the province that the company had its plants were already enfeebled economically. This is when the ROK in May 2018 followed up by identifying five regions as industrial crisis zones, which would receive tax and hiring incentives.

Key interventions in Korea and Japan

The heavy hand of the ROK and Japanese government have not always bode well. The ROK was brought summoned to international tribunals over the last decade because of its interventionist habits. More recently, in 2017, Japan faced the same challenge after stepping into the sale of Toshiba Memory.

Korea, Korea Exchange Bank and Lone Star Funds

During a period of financial instability in Korea, Lone Star Funds (LSF), an American private equity firm, acquired a majority stake in Korea Exchange Bank (KEB). As the economy recovered, LSF attempted to sell its shares from early 2006. Until 2012, however, no transaction succeeded because the Korean government delayed approval of the sale under claims of on-going prudential and tax investigations.

LSF pursued legal action against the ROK in 2012 on grounds that it was subject to “repeated acts of harassment” as well as “arbitrary and contradictory tax assessments”. The ROK argued in its defence that the sale of a domestic financial institution as large as KEB would not only have resulted in considerable non-cyclical impacts to employment, but also would leave the domestic financial industry in disarray.

Arising from complicated interactions through a joint venture agreement, Toshiba decided to sell Toshiba Memory Corporation without consent from Western Digital in mid-2017. While Western Digital sought international arbitration, Toshiba was attempting to expedite the sale to avoid its delisting from the Tokyo Stock Exchange - a typical step toward bankruptcy as shareholders then prepare to unload their assets before prices dwindle and financial institutions seek loan repayments. While the sale attracted competitive offers from foreign bidders including Hon Hai Precision Industry, a State-backed consortium was tapped as the preferred bidder. The Innovation Network Corporation of Japan (INCJ), a government-backed policy fund that invests in electronics and technology projects, was at the core of the consortium.

The Japanese government made no mystery as to the need to keep Toshiba’s memory technology and business inside Japan. A government spokesperson, in fact, explained that the decision to push the consortium acquisition forward was made in the public interest, namely to protect jobs and Toshiba technology. Given the keiretsu business structure of Japanese conglomerates like Toshiba's, the impact of a delisting could have traveled across a wide network of interlinked subsidiary and affiliated businesses. As such, the acquisition of Toshiba Memory by a foreign investor could have had a deep impact on the very fabric of the society, economy, and thus the public interest.

From public interest preservation to business climate damages

Few may be surprised with the idea of preventing a significant part of a 140+ year-old company be sold off to rivals who would gladly see to Toshiba’s extinction or with the idea of preventing the sale of a bank should the move destabilize a domestic financial system. While at first sight, public intervention in the economy seems relevant if not important to preserve the public interest, the two cases identified above demonstrate that such actions are not without consequence. Each government assessed their respective decisions as being legitimate within the scope of public interests and of legitimate concern within the scope of international law. Governments have a right to regulate to preserve that public interest.

While arising from a substantive policy issues, the legitimacy of a government intervention is ultimately decided from a procedural aspect that can easily shift matters of public interest to obstacles in business and investment climates. Despite good faith and apparent necessity, such actions can conflict with maintaining a predictable and consistent regulatory landscape for investors – even in economies that enjoy high, stable credit ratings such as those of South Korea and Japan.